After 8 years and $128 million raised, the clock is ticking for men's retailer Bonobos

On June 1, 2015, Fran Della Badia started as CEO of men's
clothing company Bonobos.

Della Badia joined Bonobos from Coach where she was president of
its North American retail division. She was supposed to provide
Bonobos, an 8-year-old company that still acted like a startup,
with adult supervision. She was supposed to take the company to
the next level.

But, less than three months after she started, on August 28,
Della Badia announced she was stepping down as CEO. Bonobos
cofounder and former CEO Andy Dunn would be coming back to take
over.

"While I was brought in to effect change and to evolve
operations, it quickly became clear that at this stage, the
company and culture still require Andy's involvement on a
day-to-day basis," Della Badia
wrote to announce her departure.

Although its trendy, well-fitting men's clothing have been
praised by GQ
and
Esquire, it's impossible to ignore that after eight years and
$128 million raised, the company has yet to reach
escape velocity.

Even more worrisome, e-commerce startups are struggling to hit
lofty valuation targets from investors. Gilt Groupe has gone
sideways. Fab has crashed and burned. Zulily soared then sank on
the public markets before selling.

Now Dunn will have to make sure that Bonobos doesn't suffer the
fate of those aforementioned companies. Bonobos has been linked
to an IPO for years now, but it seems unlikely to happen any time
soon.

Founding Bonobos board member and Jet Blue chairman Joel Peterson
told Business Insider that the company is approaching $100
million in annual gross revenue this year and that it is
profitable.

Della Badia, who spoke to us after she left as CEO, said that she
thinks the financials are promising. But the company has to build
systems before it can scale.

It's up to Dunn now. He has to take his company to the next
level.

The clock is ticking.

The perfect pair of pants

Bonobos cofounders Dunn
and Brian Spaly in the company's early years.Courtesy of Brian Spaly

It all started at Stanford Business School in 2006. Dunn's best
friend and roommate, Brian Spaly, had a habit of self-tailoring
his pants to accommodate his athletic build.

Spaly figured there had to be other guys out there who wanted
better-fitting pants, and so he was inspired to build a
hypothetical company that would meet this need for an independent
study project. His professor was impressed by Spaly's final
pitch, which encouraged Spaly to turn it from a classroom
exercise into an actual company.

He spent the majority of his free time the second year of
business school developing the business, making deals with a
pattern maker and manufacturer. He settled on the name Bonobos
after reading an article about the bonobo ape species, a close
genetic relative to humans that is best known for being
promiscuous and peaceful.

After graduating Stanford in spring 2007 and helping Spaly sell
pants out of the back of his car, Dunn decided that he wanted to
join Bonobos full-time, but only if he was named CEO and made an
equal participant with a significant share of equity.

Spaly told Business Insider he was happy to have Dunn join and
that "he deserves a ton of the credit for turning it from this
little hobby of mine to raising money, building a website,
putting structure around it, taking a lot of risk."

By the fall of 2009, their online-only men's pants retailer had
raised $3.75 million from StageOne Capital and Forerunner
Ventures and had set up an office in New York City.

Yet tensions between Spaly and Dunn grew as the company did. The
two frequently disagreed about decisions on where to take the
business. Dunn said it was because they were "two alpha
personalities;" Spaly agreed, adding that neither of them "had a
clue" about how to run a company.

One day in October 2009, Dunn and Spaly had a conversation about
the ways they were getting in each other's way. By the end of
their talk, they agreed that Spaly was going to leave the
company.

Things worked out for Spaly, who is the founding CEO of men's
retailer Trunk Club, which was acquired by Nordstrom in 2014 for
$350 million.

He and Dunn have let "bygones be bygones." He still has a
founder's emotional connection to, as well as shares of, Bonobos
and wants it to succeed, but is wary of its place among companies
like Gilt and Rent the Runway that have raised plenty of
capital over the years but have yet to go public or be acquired.

"There's an open question around how successful some of these
businesses can be if they raised a lot of money at high prices,"
Spaly said. "I wouldn't single out Bonobos in that line of
inquiry. In general in our industry, there's going to be a bit of
a reckoning of the businesses that are really successful and the
businesses that are going to have a hard time making it long
term."

"And I'm really hopeful that Bonobos is in the former camp," he
added.

Bonobos employees work in
their New York headquarters.Sarah
Jacobs/Business Insider

Getting ahead of themselves

Dunn and Della Badia were introduced by a mutual friend in 2010.
She had a long career in retail and was an executive vice
president at Coach, and Dunn joked that he was trying to build
Bonobos into a company worthy of a CEO like her.

Della Badia was impressed with how far Bonobos had come in just a
few years. In 2013, Della Badia was promoted to president of
Coach's North American retail division. Shortly after her
promotion, Dunn sent her a text asking if she'd like to talk
about becoming CEO of his company.

When they first met, Dunn had put Bonobos on the path to becoming
the "Zappos of pants." He was strongly influenced by the way
Zappos CEO Tony Hsieh led the Amazon-owned e-commerce giant, with
its dedication to being efficient but fun.

Former Bonobos CEO Fran
Della Badia.Sarah Jacobs/Business
Insider

Dunn identified with Hsieh's belief that the best way to convince
people to regularly buy clothes from a new online company was to
primarily focus on a level of customer service other businesses
didn't offer.

He even borrowed the quirky Zappos term "ninja" as a label for
his customer service employees, and encouraged them to speak
casually with customers for as long as was necessary. Returns
were also free.

Boosted by praise from men's fashion writers, Bonobos grew a
following and pulled in $4 million in gross revenue in 2009 and
$10 million in 2010,
according to Crains.

In 2011, Dunn decided that Bonobos' association with fit should
extend to shirts, suits, and blazers to best take advantage of a
younger generation's emphasis on clothes that weren't boxy or
baggy. And although he'd once proudly declared that expanding
into brick-and-mortar stores would "degrade the quality of the
customer service experience of the brand," he had a change of
heart when he noticed that practically no one was buying anything
online except pants.

His solution was to experiment with a "guideshop," a shopping
concept that would bring the personal touch you'd find in a
high-end retailer like Saks Fifth Avenue and meld it with the
ease of shopping through Bonobos' website. These inventory-less
showrooms would allow customers to be fitted and try on
representative articles of clothing before the Bonobos guide
completed an order on their computer. If the customer did not
want to make a purchase, he was still emailed his sizes and a log
of everything he tried on.

Dunn figured that men — who typically shop for clothes twice a
year, one-sixth of the time women typically spend — would
appreciate the ease of trying something on, ordering something,
and then not having to carry it around with them.

After a successful 90-day experimental guideshop in their
Manhattan office's lobby, Dunn decided that guideshops would be
the future of the company.

A convert to brick-and-mortar, Dunn brokered a deal with
Nordstrom in April 2012 to bring Bonobos pants into 20 of its
stores and its online store. The deal was part of a fundraising
round of $16.4 million led by Nordstrom.

It was around this time that Bonobos upgraded its hipster vibe to
a professional one. Its target demo is an 18- to 40-year-old man
who wants to look sophisticated and fashionable. Its $88 chinos
and $98 plaid shirts, for example, are meant to appeal to
consumers who are either affluent or in a mid-range income
bracket. Its main audience is young, but it wants to be a brand
both older fathers and their sons would want to wear.

Excited about the prospect of taking the Bonobos model further,
Dunn launched the Maide golf wear line in March 2013 and the Ayr
women's line in February 2014. Both remain small, experimental
projects.

After two years of discussion and planning, Della Badia became
convinced of Bonobos' ability to scale and became its CEO on June
1, 2015.

The growth she saw in the company was promising.

In the first half of the year, Bonobos had gone from 10 to 19
guideshops across the US. Its pants and shorts had been in all
118 Nordstrom locations for a year and become the No. 1 selling
chino. It had grown to 320 employees, up 20% from the start of
the year. Non-pants items accounted for more than half of all
sales, and the company had more than 250,000 customers who made a
purchase in the last 12 months.

The company had recently become profitable and was approaching
$100 million in annual gross revenue. Della Badia told Business
Insider that Dunn had been fully transparent with financial
information as she considered taking the job, and its healthy
expansion inspired her to join.

Though the company was founded on pants, they now
account for less than half of Bonobos' sales.Sarah Jacobs

But it didn't take her long to realize the company she had joined
and the company she envisioned were two vastly different things.
She said that while growth was as she expected, she simply did
not anticipate that Bonobos would still feel so much like a
startup. She was at Coach when it went from $500 million to $4
billion in annual sales, but said it was on a different plane
than Bonobos.

Della Badia said she was expecting to run a more mature company,
one that did not require her as CEO to be so involved with
developing processes and training employees. "There's a big
difference between interviewing for a job and actually doing it,"
she said.

When Della Badia joined, Dunn began his new role as executive
chairman and chief brand ambassador by taking a four-week
vacation, intended to give Della Badia room to adapt to the role.
Upon his return, Della Badia told him that she was having serious
doubts about the job.

After giving it some more time, Della Badia and Dunn agreed by
mid-August that they should cut their losses and replace Della
Badia with Dunn. Dunn said he was disappointed with the failed
attempt but excited by the prospect of returning to the CEO role.

Della Badia said there were two main reasons why she only gave
the job a mere three months. One was that Bonobos' board had long
been planning on building a new team of executives by the end of
2015, and she didn't want to build a rapport with them when there
was a significant chance she would ultimately decide to leave the
company. The other was that she believed her skill set was not
translating to Bonobos, and that kept her from giving the company
her all. She didn't want to waste her or anyone else's time.

She told us that she will remain an adviser to Dunn and believes
the company will succeed, but that she simply wasn't the right
fit.

As founding board member Peterson put it, Bonobos is like a kid
about to hit adolescence. "Bonobos is still kind of in a
childhood stage," he said. "It has all the exuberance of a child,
all the capabilities, but it doesn't have all the systems in
place." Della Badia, he said, was better suited to run a company
that had all of these systems already and didn't require her to
focus on building approaches from the ground up.

It was a learning experience for Dunn. Bonobos may be entering a
new phase, but it still requires significant work before it can
become a large company competing with the likes of J. Crew and
Brooks Brothers.

"I've got more work to do to get us to a place where an outside,
more professional CEO could come in," Dunn said.

The stores have
representative items of clothing, but no inventory for
sale.Sarah Jacobs/Business
Insider

From pants startup to established fashion brand

Bonobos' growth since 2007 has been impressive for a men's retail
company, but it's reaching a critical juncture: It will either
grow up or stagnate.

Traffic analytics of the past 10 months from SimilarWeb suggest
that Bonobos has a healthy base of loyal customers — direct
traffic to the site leads the industry at 53.5%, and browsing
time and page clicks are second only to J. Crew — but the number
of total visits to the site has been flat since the beginning of
the year.

Dunn said this doesn't worry him, and that it is the result of
having "radically cut online marketing spend from over 25% to
under 4% of net sales" as well as having "dramatically" reduced
sales promotions. Instead, his recent focus has been on building
guideshops and building their relationship with Nordstrom. "Given
all these forces we expected online traffic to be flat, but of a
much higher quality, with an online conversion rate [the
percentage of site visitors who make a purchase] approaching 5%."

It plans to expand to 30 guideshops by the end of 2016 — a
significant financial risk. Sucharita Mulpuru, principal analyst
of e-business for Forrester Research, noted
that even though the company saves money on inventory using its
guideshop model, the locations are in cities with high overhead
costs.

New York University Stern School of Business professor Scott
Galloway disagrees. His research has shown that customers want a
multi-channel experience, and that Bonobos is smart to expand its
physical presence. "I don't believe any pure-play e-commerce firm
will survive," he said.

Dunn and his investors are betting that the guideshop
model is the future of how men shop for
clothes.Sarah
Jacobs

Dunn said that the guideshops, in aggregate, were profitable last
year, and are losing money this year on account of the recent
expansion. He said it doesn't take long for most new stores to
become profitable, so he is hopeful about the new and upcoming
locations.

In a
2013 blog post, Dunn wrote that he's not only "incredibly
long on" this e-commerce/showroom model, but he considers proving
it can work to the scale he is attempting to be his "life's
work."

At the end of the summer, Bonobos seemed to be a precarious
situation, with a CEO who announced just a few months prior that
he didn't feel as if he could continue to serve the company best
as CEO.

In a
May 7 blog post, Dunn explained that he was juggling the
roles of founder, CEO, and chairman, and that he was ready to
singularly focus on being a founder-chairman. "I have a long
vision for the company, one that could take decades to unfold,
and I didn't think that my running the company day-to-day was
necessarily optimal to getting there."

The investors we spoke with, however, said they are not too
concerned about the sudden change of plans, and Dunn said that
after his recent conversations with Della Badia and the board,
he's more confident than ever.

While analysts think the company may want an exit deal akin to
Trunk Club's, Dunn denies it. "Call me crazy, but I'm hoping we
can build something standalone," he said.

He said there are no plans to raise another round of capital this
year or next or to take the company public, but the latter is an
option that remains open.

Dunn will need to spend the next couple years developing a team
and building the systems that will bring Bonobos to scale. It has
a loyal following, but if the fan base doesn't dramatically
expand, the company's burn rate could reach a dangerous level as
it continues to build new brick-and-mortar locations.

Dunn hopes, however, that these guideshops will be the key to
customer acquisition. He said that beyond driving sales, the
guideshops serve the purpose of boosting brand familiarity in the
company's largest markets.

"The e-commerce business is really challenging, and we feel like
with this online-offline equation we've really unlocked something
that can scale," Dunn said. "We've discovered how this can work.
Now let's bring a ton of discipline and focus, and let's nail
it."